For the quarter, FAST generated EPS of $0.68, edging out the $0.67 consensus. The slight earnings beat is nice, but what many investors are focusing on is the company’s reported stabilization in gross margin and improvement in operating margin.
Over the past few quarters, FAST has experienced some margin erosion, pressured by raw material inflation and higher transportation costs. Some of the erosion, though, has also been self-inflicted as the company has ramped up its Onsite and vending businesses, which carry lower margins than its branch business.
Last quarter, FAST reported that gross margin slid to 47.7% from 48.8% in the year ago period and from 48.1% in 3Q18. However, in an encouraging sign that this downtrend may have run its course, gross margin held firm on a sequential basis in Q1. FAST’s implementation of some price increases and reductions to its rebate programs helped to offset pressures from inflation and business mix.
FAST has also done a good job managing costs, evidenced by its operating margin improving by 20 basis points yr/yr to 20.0%. Its operating and administrative costs as a percentage of sales fell to 27.8% from 28.9%, driven by its ability to leverage employee-related and occupancy-related expenses.
Demand has also remained healthy as FAST delivered its eighth straight quarter of double-digit revenue growth. For Q1, net sales climbed by 10.4% to $1.31 bln, in-line with expectations.
From a broader, macro view, FAST's solid growth is a positive sign for the U.S. economy as roughly 85% of the company’s business is generated domestically. The company has exposure to many cyclical, economically-sensitive industries such as construction, original equipment manufacturers, railroads, oil and gas, and transportation.
In particular, the non-residential construction market has been an area of strength for FAST, up 13% in Q1. This is despite the fact that unfavorable weather dragged net sales down by 20-30 basis points compared to last year.
One of FAST's main growth strategies revolves around bringing business to its customers' sites -- either through vending devices or Onsite locations. For the Onsite model, FAST sets up a physical "shop" at or near a customers' site or facility and stocks it with needed inventory. Vending devices are exactly what the name implies: machines that dispense products and produce revenue.
FAST has been aggressively expanding both of these segments; it added 5,603 vending devices (+28% yr/yr) and signed 105 new Onsite locations (+39% yr/yr) this quarter. Sales through its vending business grew at a high-teens pace while sales at its Onsite locations were up 20%, driven by its expansion efforts.
Key Takeaways: As a highly-diversified industrial company that does most of its business in the U.S., FAST's financial performance can be viewed as a barometer for the overall health of the domestic economy. From a company-specific standpoint, its steady top-line growth is a testament to its vending and Onsite expansion strategy, and it indicates that its customers are absorbing the price increases. Lastly, FAST has done a good job managing costs, leading to healthy earnings growth and cash flow generation.